Taiwan Getting into Gear – A Good Year for Automotive Sales

SUVs and imported luxury cars provided much of the market momentum.

For Taiwan’s automotive sector, 2016 was a year of respectable growth in the face of a challenging economy, with the emergence of new trends and customer preferences. An injection of open-minded young buyers interested in luxury and/or utility is giving further impetus to an increasingly import-focused landscape.

“This year the auto sector continued to mature over last year,” says Chen Min-Teh, secretary-general of the Taiwan Transportation Vehicle Manufacturers Association (TTVMA). Chen said that he expects total car sales for 2016 to reach 430,000, a respectable uptick from 2015’s 420,000.

The latest TTVMA statistics show that car ownership rates in Taiwan are continuing their steady upward trend. As of September of this year, there were more than 7.8 million automobiles registered in Taiwan, or roughly one automobile for every three Taiwanese. Of those 7.8 million, just under 7.74 million were passenger cars as opposed to trucks and specialty vehicles.

Chen says the government’s scrappage program, which was introduced in January this year and will run for five years, helped maintain demand for new vehicles in Taiwan, despite the relatively low overall economic growth nationwide. Under the program, consumers giving up vehicles that are at least six years old can receive NT$50,000 toward the purchase of a new car or truck, provided the old vehicle is headed either for the scrap yard or export.

“The scrappage program has been quite successful,” Chen says. “The program was involved in around 30% of new vehicle purchases this year, which shows it was effective.”

Tim Ju, president of Ford’s Taiwan joint venture, the Ford Lio Ho Motor Co., credits the scrappage program for keeping the Taiwan market buoyant, especially during the early part of the year when GDP growth was negative. Despite difficulties for Taiwan at the macroeconomic level this year, Ju said he projects overall growth in the Taiwan auto market this year to be between 2% and 3%.

The scrappage program couldn’t have come at a better time, as overall, Taiwanese car owners are waiting longer than before to replace their vehicles, Chen notes, with the end result being a higher number of older cars on the roads.

In recent years one of the key trends in Taiwan’s auto market has been the waning dominance of domestically manufactured vehicles and the rise of imported models. That trend not only continued in 2016, but even strengthened.

As recently as 2010, automobiles manufactured in Taiwan accounted for nearly 4 out of every 5 new registrations. That ratio has narrowed significantly, with imported vehicles in the first 10 months of this year representing nearly 2 out of every 5 cars registered.

Chen says the rapid growth of import sales was the most surprising development he witnessed this year, and the trend appeared to be accelerating as the year progressed. In October, imported vehicles accounted for a huge 46.6% of sales, compared with roughly 40% on average over the period from January to October.

The new Mercedes-AMG E 63 4Matic and E 63 S 4Matic are the most powerful E-class cars of all time. (Photo: Mercedes Benz)

Ironically, this trend toward imports comes at a time when domestic manufacturers are reaping the benefits of years of investment in R&D. Taiwanese car makers such as Yulon, which manufactures under its Yulon and Luxgen brands in addition to Nissan-branded products, are turning out better vehicles than ever before, says Chen, who had spent 20 years at Yulon before taking his current position.

Due to the relatively small size of the Taiwan market, however, Yulon cannot achieve the economies of scale of its global competitors, which translates to a much smaller number of models available on the market compared to international brands. Additionally, with the increased quality of domestic offerings comes a higher sticker price, cutting in to what had previously been a competitive advantage.

“The price-performance ratio of Taiwan’s domestic vehicle brands is quite high, with consumers being able to get more features for the money than before,” Chen says. “But because volumes don’t attain economies of scale, this leads to fixed-investment amortization being comparatively high, which limits sales growth.”

Not surprisingly, Yulon has looked to the Chinese market for growth opportunities. In 2015, Yulon sold 16,000 units in Taiwan, roughly one-third of its more than its 46,000 units sold in China that same year, Chen says.

Despite the surface similarities between Taiwan and Australia – island nations with similar market sizes, large import markets and no real indigenous global car brands – Chen did not express concern that Taiwan’s domestic car industry faced the same fate as Australia’s, which is currently collapsing. The main factors in the ultimately avoidable demise of Australian auto manufacturing were a strong Australian dollar, rising labor costs, and the indifference and almost antagonistic approach of the current government administration.

Younger buyers drive demand

Several additional factors are driving the growing preference for imported vehicles in Taiwan, including a weaker yen and euro as well as a general shift in consumer tastes. One of the more interesting factors is the rising prominence of a younger demographic that in many cases is either more affluent than the previous generation or more willing to take out a loan for a vehicle purchase, especially in the luxury segment.

Taiwanese under the age of 40 accounted for 25% of luxury-car owners in 2012. The proportion has now grown to 36%, according to data from J.D. Power & Associates, the global marketing information firm that specializes in automotive data. The expansion of this younger demographic means less brand loyalty and a greater emphasis on speed and service.

As a result, Taiwanese car buyers are now more open-minded when approaching their next vehicle purchase, especially in the luxury segment, according to the J.D. Power 2016 Taiwan Sales Satisfaction Index Study, released in late September. Almost one-quarter of buyers of new luxury vehicles in Taiwan are visiting showrooms without having already zeroed in on their preferred brand or model, the study found.

“Dealers previously did not even get a chance to make an impression on fiercely single-minded customers, as the likelihood of them visiting their showrooms was low,” observed J.D. Power Asia Pacific director Kaustav Roy at the time of the study’s release. “Now the playing field is being leveled.”

This significant shift has heightened the importance of sales service, with brand loyalty and word-of-mouth advocacy closely connected to sales transaction and delivery times. On average, Taiwanese luxury car buyers want to complete their transaction within five days and receive delivery of their new vehicles within another three weeks.

Mercedes-Benz came out ahead of BMW and Lexus in terms of sales satisfaction this year, and it tied with Lexus for the top spot in J.D. Power’s 2016Customer Service Index Study. This development, combined with a wide range of more affordable offerings, some as low as NT$1.3 million, has helped the German company expand its footprint in Taiwan.

Speaking with Taiwan Business TOPICS, Mercedes-Benz management described 2016 as a “harvest year” in which sales volume, dealership strategy, and branding combined to produce excellent results. Its top-selling vehicles at the moment come from its C-, E- and S-Classes. The E-Class models were relaunched this year to feature the Intelligent Drive suite of semi-autonomous driving features, such as autonomous braking and assisted lane changes.

The number of new Mercedes-Benz registrations in the first 10 months of this year reached 20,372 units, representing strong year-on-year growth of 14.7%. More than one-quarter of the new registrations were in the SUV segment, including the GLA, GLC, GLE and GLE Coupe, which grew by a huge 71.9%.

“SUVs are now extremely popular in Taiwan,” says TTVMA’s Chen. “They’re often being used for leisure travel out of the city and are valued for their safety, high degree of visibility for the driver, and the greater level of comfort they offer on longer trips compared to smaller cars, although they consume more fuel.”

Given the ongoing glut in the global oil market and the concomitant low gasoline prices, the relatively low fuel efficiency of SUVs is unlikely to be a stumbling block in showrooms anytime soon. The rise of SUVs is eating into sedan sales, which are on the decline, leading to dealerships showing more SUVs, Chen says.

Smaller SUVs, such as the Suzuki SX4 Crossover, which combines SUV and hatchback elements, and the all-new Honda HR-V could continue to boost the strong performance of SUVs at the cost of sedans.

TTVMA statistics show that medium-sized cars – those with engines between 1600cc and 2000cc – were the worst-performing market segment in 2016, with unit sales dropping by 21.8% in the first 10 months of this year.

Introducing new models

In addition to the recent launch of the all-new Kuga in November, Ford’s Ju says he sees good opportunities for two of Ford’s larger vehicles that are still relatively new to the Taiwan market: the Tourneo and the Ranger pickup truck.

Ju considers the 7-seater Tourneo to have high potential for shuttle use in Taiwan’s growing tourism market, which has been shifting away from large tour groups to smaller groups. The Tourneo can also be modified for passengers in wheelchairs, which is relevant as the government is pushing to increase the number of handicapped-friendly taxis. Beginning next year the Tourneo will be available in Taiwan with automatic transmission for the first time.

“More and more customers are going for trucks and SUVs,” Ju says, “so we’re paying attention to how this is going to affect market segmentation.” Ford also offers an SUV in the Taiwan market, the EcoSport, which is manufactured in India.

“Trends keep changing,” Ju notes. “Several years ago, large MPVs were popular in Taiwan, but with the reduction in family size, MPVs have gradually lost their appeal to households.”

Ju sees rising interest in this market in pickup trucks, which are still a very new phenomenon in Taiwan. “Ranger has been a huge success for Ford in Asia Pacific markets like Thailand, Australia, and New Zealand,” he says. “Taiwanese cities are quite crowded for this type of vehicle, but they’re excellent if you take them out of the city.” Ranger is also suited to agricultural use, he adds.

Ford launched the Ranger in Taiwan a year ago and it is generating interest among people who spend a lot of time outside the city, especially millennials interested in more active outdoor lifestyles such as surfing or camping, Ju says. Entrepreneurs with small businesses are also a potential market for pickups.

“There are some similarities between the Thailand and Taiwan markets,” Ju says. “In Thailand, a lot of people run their own small businesses, and they use their truck for their businesses. But now they’re mixing business use with leisure. In Taiwan, there are a lot of small business owners using their own trucks, highlighting the mixed-use potential for other people to see.”

For potential truck buyers concerned about fuel efficiency, the Ranger is available with Ford’s EcoBoost engine, which provides greater horsepower in a smaller engine, increasing fuel efficiency while reducing emissions. For example, a 2-liter engine with EcoBoost can produce 245 horsepower.

In addition to the usual challenges in opening a new market, the Ranger is also facing regulatory obstacles. It is classified as a commercial vehicle under Taiwanese regulations, which allow for only one row of seats. That creates an awkward situation for owners who buy the truck for personal use and may be stopped and questioned by police.

“The government is in the process of amending the regulations to recognize that vehicles like the Ranger are not commercial vehicles, and will legalize the second row of seats,” Ju says. “We expect demand for this type of utility truck to increase.”

Overall, says Chen of the TTVMA, government regulation of the automotive sector is getting stricter, which is leading to higher costs for manufacturers. In September, for example, Taiwan’s Environmental Protection Administration unrolled new emissions regulations that will impact both vehicle manufacturers and owners.

Beginning September 1, 2019, Taiwan will observe the Euro 6c emission standards for new automobiles. The same standards will be applied to already-owned cars as of September 1, 2020. Cars that satisfy the U.S. Environmental Protection Agency’s Tier 2 bin 5 standards will be considered compliant in both cases.

While emissions standards are generally viewed as necessary by most stakeholders in society, other regulatory areas are more contentious, especially in the ride-sharing space. As discussed in the cover section of this issue, Uber has continued to be in regulatory limbo in Taiwan, subject to huge fines and the threat of loss of its investment approval as an information company. Taiwan’s taxi drivers have been the main source of political pressure on the government to forbid Uber from operating legally in Taiwan.

As the automotive industry moves away from a manufacturing-focused business model and toward combining products, platforms, and services under the heading of “mobility,” sharing has become a pillar of many companies’ future plans, alongside electrification and autonomous driving. Daimler AG, for example, has been a pioneer in this space with its free-floating car-sharing service car2go, which is effectively an Airbnb for automobiles. It allows owners to create profiles to advertise their cars to potential users who need a mode of transport but are put off by the expense of purchasing and operating their own car. Regulatory issues are preventing the introduction of services such as car2go in Taiwan.

Looking ahead to 2017, Chen says that barring any major shocks, he sees stable growth for the market overall. “We’re expecting the share of domestically manufactured automobiles to stop sliding and bounce back,” Chen notes. “We also see the number of cars bought with help from the scrappage incentive program gradually increasing.”

Chris Horton is a journalist based in Taipei, Taiwan. He has been writing about Asia for more than a decade, covering topics including news, politics, business, travel, the environment, sports and the arts.

Taiwan Business TOPICS

Taiwan Business TOPICS is published monthly by the American Chamber of Commerce in Taipei, and covers current topic affecting business conditions in Taiwan, an Industry Focus section on a particular industrial sector, and other reports prepared by the magazine’s staff of experienced professional journalists.